Beneficiation and Value Addition

3. Policy considerations

To ensure the effectiveness of beneficiation policies, a number of factors need to be considered.

Different costs and benefits across minerals

There needs to be an understanding of how much value can be created and a process for identifying where in the value chain value creation can occur. For precious metals and gemstones, for example, relatively little value can be created through polishing or refining, in contrast to value that can be created in manufacturing jewellery. Other commodities might not have a positive future outlook, such as coal, or may lose value over time, like steel, and hence not be a suitable for a country to acquire long-term benefits. This means that it is pivotal to fully grasp a mineral’s full beneficiation potential over time and to tailor policies targeting those minerals with the highest potential.

Existing infrastructure and ancillary industries

Value addition processes require certain infrastructure, such as transportation, water supply, or electricity. As a consequence, it is important to consider whether the infrastructure to support beneficiation facilities already exists, and what would have to be built in addition. Also, depending on the available infrastructure, pushing beneficiation at all stages of the value chain might hamper diversification, as other industrial sectors might have to compete in their access and use of infrastructure. However, if available capacities and infrastructure are stable and large enough, diversification might be supported through shared utilisation of infrastructure by several distinct industries. The existence of ancillary industries, both up- and downstream, plays an important role in this context as well, as the success of beneficiation policies is often connected to the availability of linkages that allow other sectors to be tied into value-addition processes.

Global competitiveness and access to markets

There needs to be an understanding of a country’s global competitiveness. One important factor is the geographical spread of a certain resource, the cost of transporting a higher value good and the distance of the downstream facilities to the next possible market. Another factor is a location’s availability of skilled labour and cluster of businesses. Distance and cluster are also important when it comes to scale. For an industry to produce in scale, there needs to be a security of sufficient input and supply for production. Disruptions are a risk in a high capital cost environment. Anther pivotal aspect needed in policy considerations are markets, the (processed) commodity demands and trends. Analyses of the markets, reviews of comparative advantages and the weighting of costs and benefits are important steps in this regard. Hence many of the countries that successfully initiated value addition policies provide for a sizeable domestic market, such as Indonesia or South Africa.

Opportunity costs

Government needs to understand potential opportunity costs as well as it does the potential value addition. While beneficiation policies represent the opportunity to increase a country’s benefits from its extractives industries, they might also affect investor sentiment. In particular, prescriptive measures connected to the implementation of beneficiation can drive away investors.

Export bans, provisions on investment or partnerships for smelting, processing or manufacturing are connected to costs and might erode potential profits to the point of non-viability. Investors look for predictability and stability in the legal landscape of producing countries. Sudden changes in policies might come as a surprise and shy away not only current producers, but prospective ones. On the other hand, well planned and long-term oriented policies can be accepted by companies, as long as the cost of doing so is kept within bounds and undertaken on the basis of an understanding of investor views.

Connected sectors

The McKinsey institute identified five distinct groups of economic sectors in resource-rich countries that are particularly connected to the resource sector, and which have different exposure and dependence on the sector. The manufacturing sector is the most exposed, sometimes adversely affected by resource booms through increased input costs due to increased price and exchange rate appreciation. The so-called ‘resource-riders’ like transport, construction, technical services and utilities, by contrast, thrive when the resource sector booms. Finally, local services such as retail, information, telecommunications and agriculture are on the one hand connected to the resource sector, but less affected by its cycles. Countries that can navigate resource booms and busts have extended regulations to these groups of sectors as well.

Financing and access to capital

Facilitating and implementing beneficiation facilities can be costly, both for the government and for companies. The latter access their capital depending on the risk factor of the investing country. If, as mentioned before, a country is considered high risk, for example because it requires the company to invest in building downstream industries, the cost of capital might increase.

Some countries, such as certain BRICS countries like Russia, have chosen an import substitution policy in the last decades, increasing taxes on imports and supporting sector development through these streams. This is a controversial step, as consumers and intermediate industries might be burdened with higher prices. Today, import substitution as a broad-brush policy tool has been replaced by a wide range of alternatives (such as elaborated in the tools section above). The private sector has been playing an increasing role in public projects. Some countries have set up investment promotion agencies. Next to showcasing investment opportunities, these agencies support potential investors in navigating the administrative landscape of a country, and in communicating with other agencies regarding the challenges investors might face. Another difficulty lies in supporting connected industries, such as suppliers and service providers. Regional development banks, multilateral agencies and sometimes companies themselves can be engaged, as local content has been playing an increasing role.

Inter-agency cooperation

Countries that have designed and implemented beneficiation frameworks need to build a strong inter-agency cooperation. Stronger monitoring and enforcement capacities are important. However, the more complex the regulation, the more complex the potential administrative cost of implementing it. Successful examples include Mexico, which installed a presidential steering group managing coordination between the different ministries. Also, the prioritisation of a small number of areas instead of trying to manage multiple ones with a ‘one-size-fits-all’ approach has proven successful. Some countries have created small groups of highly skilled people in so-called ‘delivery labs’. Their role is to solely concentrate on implementing policies, thereby linking policy makers with different layers of public administration. One such example is the Malaysia Performance Management and Delivery Unit.

Resource dependency

Resource dependency might increase by concentrating on beneficiation. The steel industry exemplifies this risk. Since 98% of iron ore is used in steel production, developing downstream industries such as manufacturing means iron ore producers would have to support the development of smelters and steel plants. However, the global steel market has been saturated in the past years, even though iron ore demand is still significant. This is mainly due to China’s competitive steel industry. A country concentrating on beneficiating iron ore might risk being at the mercy of commodity prices but increases its exposure further if two or more industries are connected to them. Should prices fluctuate, the margin for manoeuvring for downstream industries might be too narrow, leading to either collapse or reliance on raw material imports.

Skills

Skills are an important aspect and are part of the so-called horizontal linkages. Required skilled labour is different at each stage of beneficiation, requiring a considerable amount of investments. Companies might invest in skills development, however, given little return on developing a downstream sector, they might not invest in any other industry than their own. Therefore, skills development is a constant dialogue between the governments and the various stakeholders. Furthermore, a government needs to understand the demand for specialised skills, the cost of investing in these skills locally and the opportunities for transfer. At times, it might not be viable to invest in those skills locally. For example, manufacturing skills in jewellery is globally concentrated in a few countries only, making the skills development relatively costly, especially in relation to low profit margins.

Availability of data

To implement beneficiation policies, percentage grade, export bans, import quotas, all need to be based on reliable data. A lack of data can result in imprecise policies that risk either effecting no change, or negatively impacting the industry. Monitoring capacities are thus an important factor in policy formulation.